Sunday, March 25, 2012

Lazy Macroeconomics

I wish I didn't have to do it, but it's time - once again - to stick up for economic science. Krugman has crossed the line (I know it when I see it) here. If it offends you that he offends me, then stop reading. You're not allowed to whine about Krugman-bashing. The guy deserves it, after all.

Here's Krugman's assessment of the state of modern macro:

...my sense is that a lot of younger economists are aware, even if they don’t dare say so, that freshwater macro has been a great embarrassment these past four years, and that liquidity-trap Keynesianism has done very well. This will affect future research; it will, over time, break the stranglehold of decadent Lucasian doctrine on the journals.

How would Krugman have a "sense" for what younger economists are thinking? He has little interaction with them. He does not go to conferences with them; he doesn't read their papers; he spends little time at Princeton. Mostly, he lives in Manhattan and writes a blog. The finger is far from the pulse, I'm afraid.

What is "liquidity-trap Keynesianism?" In case you have not figured that out, it's Hicksian IS/LM. That's been "successful?" How could it be? It's not structural.

What is "decadent Lucasian doctrine," and why the heck is it so decadent? Good questions. You'll have to grill Krugman on that. As far as I can tell, we are all "Lucasians" now, and that includes Krugman, who uses many "Lucasian" principles. Complaining about Lucas is something like complaining about the other Bob - Bob Dylan. The revolution happened long ago, and now everyone loves Bob and his influences are everywhere. Krugman might like it if the Bob "stranglehold" somehow let go of the profession. Too bad, Krugman, that's not happening.

Here are the last two paragraphs of Krugman's post:

And the giggles and whispers thing — in which anything resembling non-microfounded Keynesian analysis was the subject of automatic ridicule — is already, I think, over. Look at Delong/Summers on fiscal policy: the analytical core is, yes, the IS-LM model.

In a better world, Brad and I and our fellow-travelers would have achieved an immediate transformation of both policy and doctrine. We don’t live in that world. But I think we are winning the argument, in ways that will make a difference.

I don't think this is about giggles and whispers any more. We're all guffawing out loud, I'm afraid. I looked at the the DeLong/Summers paper, and you really should not waste time on that piece of trash. The analytical core is, yes, an IS-LM model. Yikes. Again, there are many reasons why we don't want to go there any more, including the ones I articulated here, and here.

In the better world I'm thinking about, we would not have to put up with arrogant loud-mouths like Paul, Brad, and their "fellow-travelers." The world these people envision is one where lazy macroeconomics has free-rein. We would forget everything we have learned in the last 40 years or so. Better still, we could set the way-back machine to 1937. Why fuss with all those bothersome details? IS-LM is so easy - and so right. If you believe that, I have a bridge to sell you.

249 comments:

For some reason, others seem to have a more positive take. E.g., http://gregmankiw.blogspot.com/2012/03/limits-of-monetary-policy.html.

Now, you can always claim that Mankiw wants a future job in Washington. But, my sense is that it was well received at Brookings. Definitely not deemed a piece of trash by most besides yourself. Care to explain?

In what way did Krugman cross the line? In pointing out that some young economists are looking at alternatives to 'structuralism', incl. revisiting old-school Keynesianism? Or in that RE is basically dead? Why is that offensive?

Equally, what are your substantive criticisms of DeLong-Summers? Other than that it uses IS-LM. That, we have duly noted.

2. Here's a start for the DeLong/Summers paper. "The multiplier" is an answer to a question. If government spending on some class of goods and services increases, and that spending is financed in a particular way, then real GDP increases by how much over what period of time? In the DeLong/Summers "model," the multiplier is a parameter. Thus, it's a non-starter. I could go on from there. It's just not serious work.

That makes sense. That is, do you mean that because "mu" depends on the composition of the stimulus and therefore treating "mu" as a parameter assumes that welfare does not change with the composition of the stimulus (ie. cost-benefit analysis omits some of the costs and benefits by treating "mu" as a parameter)?

Whatever you think of Krugman's macroeconomic ideas, this post makes his point perfectly. If Krugman was a rogue physicist denying quantum mechanics, you would have some grounds for (mostly) ignoring him, but macroeconomics is not physics. No macro ideas come close to meeting ordinary scientific standards of sucess. Your heroes may be on your side in denying the relevance of critiques by others, but if you want to persuade the next generation of macroeconomists to build on your ideas rather than to discard them, you're going to have to do better than making arguments from authority and citing your paradigm's rigid parameters when it has hardly proven its scientific worth over the last few years. Krugman may well have the inferior perspective, but at least he's trying to defend it to non-believers. You should try it some time.

i'm familiar with what blogs are. I also know the difference between a blog that mostly assumes the audience already agrees with the author, and a blog that takes on criticisms from those who disagree with substantive arguments and evidence, instead of rank-pulling, citing as gospel the very propositions and methodologies which are at issue, and invoking authorities whose authority on a matter is what's in question. One more time: economics is not, just plain isn't physics. Not even close. Doesn't mean it isn't worth trying to answer economic questions, but please stop pretending that there's all this stuff we know is true or is the only right way to study something, and attacking others for disagreeing. Believe it or not, I think Krugman is very often guilty of this. I don't buy his macroeconomic ideas. But I've read enough of your blog posts to see that you very rarely try to actually establish your basic worldview. Obviously you disagree, but as someone who knows a fair bit about contemporary macroeconomic theory, I think you need to try a lot harder. Consider it a friendly suggestion. Your ideas are not nearly as obviously correct to those in the know as you think, and the more you communicate to young researchers that there's no good macro that's not given the nod by Stephen Williamson, the more quickly you can be sure your ideas will become as well-regarded as Keynes is to you.

Could you elude to what you mean by "rogue economist" please. Someone who asks questions about other theories and opinions rather than accepting them as gospel? Isn't that exactly what you're doing and what we all should be doing?

Stephen, keep up the good fight. Krugman is simply destructive and should be challenged every time he opines about the state of macroeconomics. Also, your characterization of DeLong/Summers is spot on ... pure, unadulterated rubbish.

you are absolutely right about the state of macroeconomics--its health is perfect.

Why, we just went 3 for 3: (1) we did not have any hint or idea the Lesser Depression was coming; (2) we have no idea what caused the Lesser Depression; and (3) we have no idea what to do about the Lesser Depression (we won't use either or both fiscal or monetary policy, nor will we learn from Japan).

And, I almost forgot: But we can see inflation even though: (1) we didn't see inflation the last time (the bubble in real estate); (2) Europe is in recession and it is going to get worse; and (3) in 2013 we are going to have massive fiscal deflation (tax increases and spending cuts)

Whatever the problems of macroeconomics are, they are the problems of microeconomics ; and hence all economics. The idea that a macroeconomics in which the authors simply posit relationships between variables--and never once couch problems in terms of decision makers with clearly specified objectives and constraints, where the constraints in turn reflect the aggregate of others actions--indicates its monumental sterility. Why does the public not find Krugman simply vacuous? We neednt find him rotten...

When you do what he and delong do, you likely are too scared that your end result won't be rationalizable if you do indeed spell out what the hell people and firms are doing, and.what they want to do. They bring us hand waving chickenshit macro that has no capacity for telling us anything normative. Why? Because you're never told what people value and want to do. How disrespectful of individuals can one be--especially as these guys blather endlessly about how much they care..and how little their "opponents " do.

I'm a young economist. I'm not thinking about ISLM. I don't think anyone else is either. The good ideas from Keynesianism have either been incorporated into NK models or the work of folks like Roger Farmer. If you think Keynesianism is important, then you should be expanding on these ideas not revisiting the stuff Krugman is referencing.

Steve, the discipline at large is behind you even if the blogosphere explodes.

Exactly. I'm going to the SED meetings this summer, where most of the papers are presented by people under the age of 40. I'm sure I'll see a lot of Keynesian and non-Keynesian economics, which uses methods that people like Lucas and Prescott would approve of. Those under-40 economists won't be talking about Paul Krugman, Brad DeLong, Noah Smith, Scott Sumner, etc., and they won't be doing IS-LM.

Andy's work and mine intersects a little bit. For example, we have both written about market segmentation and how that matters for monetary policy. I see him sometimes at conferences. In general I like his work, and have a lot of respect for him. We each have our own research programs, and there are many things each of us have explored that have little intersection, other than perhaps a shared methodology. I'm not sure what kind of "reconciliation" you are looking for, or why in hell you expect to find it.

In the second paper this statement is made, "That common assumption, however, is grossly inconsistent with a well-established feature of the data: nominal rates of exchange between major currencies are well approximated by random walks."

Now, from this, given the scope of international trade, today, I would argue that it is substantially likely that inflation is just a random walk, that should be wholly disregarded, for the price of commodities merely reflect random walks of the currencies in which they are priced.

The paper continues,

With our interpretation, we can restate our point: the fact that exchange rates are approximately random walks implies that most of the fluctuations in interest rate differentials are changes in risk—a feature that standard models do not link to monetary policy changes.

If changes equal risk, then oil prices rising on signals of troubles with Iran are not inflation, they are increases in risk.

This means your model is incorrect in showing inflation. What your model is showing is increasing risk.

I wouldn't think Summers & Delong are nobodies marginalized by the profession and regarded as cranks. But I wouldn't expect them to be indicative of the views of young economists either. Noah Smith is an actual young economist though.

Noah is currently a graduate student, and will be working at the business school at SUNY Stony Brook in the fall. He knows a bit about macroeconomics. Do you think his ideas are driving the profession, or what?

Steve, do not *ever* back down when criticizing Krugman or pointing out flaws in his reasoning. Krugman got some of the best positions and prizes that the Econ profession has to give out in the world, past prof at MIT, Bates Clark winner, Nobel winner. Krugman cannot be allowed to get away by claiming silly stuff. I wish more of the famous academics would confront him, and put him in his place. But, unfortunately, they do not.

re: what younger economists are learning, here's a syllabus for grad macro from one of DeLong's colleagues at UC-Berkeley. It's also a very standard syllabus across grad programs. Now, check out a similar class from Michigan, taught in this case by a Minnesota PhD:

http://www-personal.umich.edu/~jzhang/Syllabus642.pdf

Both are very heavy on models of the implications of smart, forward-looking decision makers. Bot are very light on the ad hoc aggregate relationships PK advocates.

Here's a big part of Keynes is ejected from syllabi: his model of consumption is very very bad, it turns out: http://ideas.repec.org/a/aea/jeclit/v48y2010i3p693-751.html

So, PK can keep wishing that we'd model people as dumb, use models of consumption that are gross odds with the data, and think of investment as largely spasmodic and not primarily the result of peoples/firm's deliberate processes.

And here is Kocherlakota's take, which some will have seen.http://www.fperri.net/TEACHING/macrotheory2012/stateofmacro.pdf

How would Krugman have a "sense" for what younger economists are thinking?

Now, it seems to me that what young economist think is going to be determined by two factors: (1) those to whom the facts don't matter will simply have careers built on bias and prejudice, per Kahneman (there is no science here), just like Lucas, Cochrane, and Taylor, now (the need of special interests for BS is unending); and (2) those to whom the facts matter will hold their opinions until seeing how the Lesser Depression plays out.

Krugman's implicit bet is that the the Lesser Depression is going to end badly, in a second Depression, caused by austerity. If he is correct, probably even the Wayback machine will be purged of this blog.

People who suggest that inflation is going to be the problem are just as intellectually lazy as Krugman. We need a whole new kind of "science," although I doubt such can emerge because of the friction of special interests. Even if we actually had useful, forwarding looking insights, our culture and political institutions are in such shambles that we would never be able to implement any real insights.

Look at Delong/Summers. Assume they are wrong. The mere existence of their position makes doing something else impossible politically. Look at Lucas/Cochrane/Taylor. Assume they are wrong. The same result follows.

We are where we are because the "science"is not unified. It is become unified only when some point of view or collections of views becomes so self-evident that those in opposition are named and thrown out into the street.

Until then the wise young economists with become like potential supreme court judges---never publish or say anything that can be used by one's enemies. No will will know what they really think

"liquidity-trap Keynesianism" has been consistent with what we have observed in the last 5 years. I think it is certainly valid to use that framework to explain the basics of those developments to students/press, etc. I think we are disingenous to be dismissive of that model as a framework to think about the macroeconomy.

To more deeply understand these developments, however, one needs more sophisticated models. and that is the stuff young macro peole are working on. Krugman is disingenous about that.

BTW, I think you go a bit far in calling Summers, DeLong's paper a "piece of trash."

According to M Friedman's "Positive Economics" approach, whether a theory is grounded in Microfoundations or not is irrelevant. Friedman argued that a theory should be evalutated on whether it yields a more "accurate" description of the variables it seeks to model. Krugman is merely applying a "positive" approach to evaluating models.

Also as someone who received his Ph.D. 20 years ago at Chicago in macro and finance, Krugman fairly accurately describes the intellectual milieu at that time. No readings from freshwater schools assigned or acknowledged; all research and theses were DSGE intertemporal models basically.

You're right that Krugman is describing a world that existed long ago. Not 20 years ago. More like 35.

Friedman did in fact care about what you call "microfoundations." Friedman told us you could not stare at the data and draw policy conclusions - you actually need a theory to make sense out of what you are seeing. That's the spirit of the permanent income hypothesis (http://www.nber.org/books/frie57-1) and the Presidential address (http://www.aeaweb.org/aer/top20/58.1.1-17.pdf). I don't think Friedman would find much in common with Krugman if he were alive.

I get that many economists, including yourself, are angry at Krugman's message. I have to say that, to a layperson such as myself, your argument seems defensive and non-specific. If I were to summarize the debate it would be:

PK: "None of the things we have learned in the past 40 years, none of the models, not even the new-keynsian models, do a good job of explaining the depressed economy in the aftermath of the recent financial crisis. We should work on improving these models so that they can explain this type of event. In the meantime it makes sense to use the IS-LM model for certain types of analysis, because even though it is simplistic it does the best job of explaining what's going on in the real world."

JSR, perhaps the reason you find it unconvincing is because you are too lazy to go back and read all of Steve's substantive rebuttals of Krugman's outrageous claims?

The "liquidity trap" that Krugman speaks of exists even in a modern class of models. There is nothing in IS-LM that cannot be done better in modern theory. If you think you can understand the current recovery by the intersection of two curves, by all means, continue to listen to Krugman.

David, I can't say I've read every post Steve has written rebutting Krugman, but I've been following closely enough that I've already read the posts he linked to in this entry (and rebuttals to at least one of those posts elsewhere). But most of his rebuttals seem to be, in one form or another, that modern models are good, despite the unrealistic assumptions they make.

I think I do understand what you're saying -- that the economy is a whole lot more complex and subtle than the IS-LM model can capture. I agree with that -- who wouldn't? But I would argue that doesn't disqualify IS-LM as a useful model for people who understand its limitations. Steve made a similar argument defending certain DSGE models in his critique of John Quiggin's book. But the point that Quiggin (and Krugman) are making is that modern models failed to give us good policy advice in the most recent crisis, and that is not acceptable.

I can't claim to understand all the technical details underlying modern DSGE models, but I believe that Krugman, Delong, yourself and Steve all understand them quite well. And there appears to be considerable debate in the blogosphere as to whether the modern method is the appropriate one. I see one group of economists pushing for a sea-change in the way macro models are thought about and built. I see another group of economists resisting that call for change, or at least trying to defend the status quo against perceived slurs. As an outsider, it seems like a reasonable argument that the foundations of modern macro should be revisited in the wake of the financial crisis. The reason I find this post unconvincing is because it is dismissive of that idea.

Ok -- I've read it again, but I'm afraid I still don't get it. You touch on a lot of different things in that critique, and some of those topics I don't have the background to fully understand, so please bear with me.

I can see you argue that monetary policy has largely been driven by new-keynsian models, and so a failure of policy should be attributed to new-keynsian ideas. Is that what you're referring to? I don't see a discussion of alternative models that would have given us better monetary advice. Have I missed something?

1. What do you do for a living?2. What training do you have in economics?3. Obviously you read Paul Krugman. What do you find so convincing about what he writes? How do you evaluate what he says?

Now, to answer your questions: Given what we now understand about the financial crisis, that was not a failure of monetary policy. It was a failure of regulation, and design (i.e. failures in the United States, going back to the 19th century and even earlier, to design a robust financial system and regulate it properly). During the financial crisis, the Fed actually did pretty well. I don't think you can fault their lending policies during the crisis, though they may have gone overboard somewhat in how they propped up large financial institutions. Post crisis is another story. The failure of the Fed in 2009 and beyond is a slowness in catching up with developments on the research front that have been with us for a long time. This is where people like me who have worked on banking and monetary economics for a very long time (others are Randy Wright, Guillaume Rocheteau, Ricardo Lagos, Nobu Kiyotaki, Mark Gertler) have something to offer. Not everyone wants to listen to us, though. The New Keynesians understand that "financial frictions" have now been demonstrated to be important, but they still haven't quite learned how to do it.

As for what I am not convinced about Krugman, it is that to just helicopter drop money would help.

I am convinced, in fact by you, that it will not because not only do we not have a robust financial system and we don't regulate it properly, we don't have a robust economy and we don't regulate it properly either.

This is where I really think that your siding with Lucas, Taylor, Cochrane, Becker, Posner, Greenspan, et al hurts. They don't want a robust financial system for such strikes at their core principal which is that gov't is bad, always, in any shape or form. They sure don't want robust regulation of the economy. There loadstar is whatever best promotes the shortest term advantage of the extremely wealthy.

Now I get it. How am I "siding" with the set of people you mention? Lucas I admire very much, and I have absorbed his ideas and use them extensively, as does most of the profession. Taylor I hardly know. I could hardly tell you what is in his papers. I pay little attention to what he does. Cochrane I know a bit. He has some interesting ideas, but some of what he does I don't like. Becker is certainly an interesting economist, but pretty far from what I do. He's certainly not a macroeconomist. Posner is a law and economics guy - pretty far removed from me. Greenspan is a former Fed Chairman who really never did academic economics, and was given far too much credit during his tenure at the Fed, as far as I can tell. Some of those people are Republicans. I certainly am not. Post-1970 macroeconomics is not some tool of the right wing. Far from it. This is just science. Neither is it the case that you somehow abandon liberalism if you abandon the IS-LM model. One can take the tools of modern macro and use them to make the poor better off - in an efficient way of course. One of the reasons I disagree with Krugman is that I think he is selling you snake oil. He is well-intentioned, but the things he is advocating will actually hurt us all. One of the things he advocates is abandoning science in favor of religion, essentially.

Not sure if this was clear already, but the Anonymous poster above is not me. I'll try to answer your questions to clarify where I'm coming from:

1) I work as an analyst for a hedge fund, doing things like building simple models of the electricity markets.

2) I have minimal training in economics -- an undergraduate degree.

3) I read Krugman -- several other econ blogs as well (including yours, clearly), to get different viewpoints, but his was the first I started following.

When reading, I try to judge common-sense things like 1) Is blogger X internally consistent when discussing theory? 2) How well do the things he argues match up with what I see in the real world? 3) What quality of evidence does he present to support his arguments? 4) How practical are his arguments and how relevant to what's happening now? 5) How does he respond when his views are challenged?

These are things that a reasonably intelligent person can judge without having to understand the nitty-gritty of DSGE models. I'd love to judge what I read more robustly, but I don't have the background. So when I say I find Krugman persuasive, it's because of soft judgements like these -- he tends to make practical arguments about real-world policy impacts that frequently turn out to be true. On top of that he walks through his reasoning and his evidence in a fair amount of detail so that laypeople can follow along.

I'm perfectly willing to give your arguments the same weight as his, but not just because you claim to be right. You claim that IS-LM is snake oil, and that there are better models to use in analysis of the financial crisis. Fine! I have no particular attachment to IS-LM. What are these other models? How do their behaviors differ from IS-LM? What insights do they give us and why are they better? What kind of things would they say about inflation and growth over the medium-term given the current policy regimes in the US and Europe? Since I don't have the economic experience to judge your more theoretical statements and I don't see the kind of practical supporting evidence that would help me understand your points better, I can't be convinced by your argument. Even if you are 100% right and Krugman is looney, I don't think you've made your points rebutting Krugman in a way that can be judged well by an interested person without an economics PhD. And the fact that Krugman is not the only reputable economist saying we should be thinking more carefully about microfoundations makes it that much harder for me to accept your judgement as superior to his. I hope I'm not coming across as disrespectful here. I'm just seeking out different viewpoints and trying to honestly communicate my own best judgement.

Krugman is fighting for Modernity, after Summers and Romer blew it big time. That, and after the AIG bonus story (thanks to Geitner) from which Obama has never recovered.

Since Lucas was wrong and macroeconomics did not have the answers all Krugman has is an old canon: Keynes.

In this political environment, he sure as hell can't go write a column that says Williamson says "inflation," even if you are right.

All that would result in would be austerity that would crush the life of most every American.

Your problem is that you don't care a wit about the millions and millions of Americans who are really really hurting.

Since you started this blog, never once has you written a word about what can be done, tomorrow, that can help them.

You praise a man who is single handly most responsible, Lucas. You wholly fail to consider the pivot point of his speech. He mislead people into believing that risk was gone from the system.

With friends like you, who needs enemies.

The War is going to be this fall. If Obama loses,it is over. In 10 years the entire country will be what the central valley in California has become in the writings of Victor Davis Hanson or what Baltimore or Detroit or Cleveland or St. Louis have become in their inner cores.

That's why the Right is using every tool to find every "intellectual" argument it can to fight Modernity, like the Kochs taking over Cato.

The Kochs are dying laughing that you are doing their work for them by attacking Krugman. Do you seriously think that anything you think, write, or say about your "science" matters to Mitt or the Kochs or Paul Ryan or the Tea Party or Ron Paul? They reject your entire premise. They understand that life is not "science," it is conflict. They want political power and the riches that follow. They want what is best for themselves and their contributors, not what is best for America or 99% of its citizens.

What do you think these people think of you?

That is what you ought to be concerned about, not Paul Krugman and what he says about your "pretend" science because the political enviroment leaves him no choice but to shape the arguments as he does?

Last, are you so dense politically that you do not understand that, even if your are right that the Fed blew something in 2009, you cannot say or write such?

What is going to be the reward, even if you are right? Well, the reward is going to be that Mitt and the Tea Party is elected and, reasoning like their hero Thomas Sowell, they will abolish the Fed and return to the goldstandard.

That is the point of your statments right: you want to abolish the Fed and return to the gold standard, right?

If not, what is the point of your writing?

Here is how your thoughts on the Fed and Inflation will be used by Thomas Sowell

JSR and DAI've read the 2 SW posts supposedly summarizing the weakness of Krugman's arguments and am thoroughly unimpressed. SW did not address the main Krugman critique! That this 30 year search for policy invariant coeficients in structural models failed. That no model since Phelps '70 has yielded an insight to macro above and beyond what can be gained with IS/LM. I searched in vain in the SW posts for his counterexample where the DSGE and structural models produce a better insight than IS/LM.

Krugman is wrong to disparage this research; it had to be done to show where it would lead to. There is no shame in a research program that ultimately comes up empty. Happens all the time. But SW denys the poor payoff to this program. Even Lars Hansen has acknowledged that the DSGE models have not lived up to their early hopes in policy work or in producing superior modeling of the economy. (2011 Conference on New Economic Thinking).

Krugman is rude and dismissive, but his arguments have critiques of freshwater macro that SW has not even addressed.

By DSGE models, what is Hansen referring to? He probably means Woodford's cashless economy models and, if so, then I agree with him. Those models do not take financial intermediation seriously enough to understand what happens in a financial crisis (they are fine for other uses perhaps).

The way you write (who ever you are) suggests to me that you are not an academic. I say this because, if you were, and if you were in our loop, you would see that we are the severest critics of our own models.

No one, least of all Williamson, got up and said Lucas, you just lied, when he finished his speech. If you are, as you say, "the severest critics of our own models," no other response to the Lucas speech was possible. His models didn't work as he was representing and he was misleading people into a very false understanding of the risks facing us all.

No, what economists do is gaga, go along to get a job, tenure, to get published, and to get rich consultancies. Would you have a job if you wrote what a bubble head Bullard really is, if you clearly believed such to be true? You say you are the "severest [of] critics," but I have never seen you write a word in criticism of Greenspan, Taylor, Lucas, Cochrane, ....

Williamson attempts to have it both ways. He argues that his brand of macroeconomics is a science that has something useful to say, but recent events overwhelmingly prove that is not true. Where were his useful papers in 2000 to 2007, alterting anyone to the Lesser Depression?

Frankly, macroeconomists are like astronomers the day after they all missed an astroid that struck the Earth in the middle of the night, killing millions of people. Or, as they say in the Ozarks, as useless as teats on a boar hog.

You don't get it. Your "science" failed. As a consequence, your "science" is now totally irrelevant to political events. It is now, just like climate change, nothing but a propaganda tool. You have no credibility. Everyone knows that opinions are being given, not because they are true, but because the speaker or writer has cynically made the political calculus that this opinion is in my narrow self interest.

My god, look at Williamson's attack on Krugman. Would any graduate student ever directly or indirectly even cite a Krugman paper on anything after such an attack, let alone commit the sin of misspeaking and saying, Krugman once reasoned?

Said simply, you destroyed your brand and attacks on Krugman only bury it deeper.

"SW did not address the main Krugman critique! That this 30 year search for policy invariant coeficients in structural models failed. That no model since Phelps '70 has yielded an insight to macro above and beyond what can be gained with IS/LM. I searched in vain in the SW posts for his counterexample where the DSGE and structural models produce a better insight than IS/LM. "

I am now dumber for having read this. Open your eyes. Read the literature. We haven't learned anything since Phelps? What are you reading?

"Post crisis is another story. The failure of the Fed in 2009 and beyond is a slowness in catching up with developments on the research front that have been with us for a long time. This is where people like me who have worked on banking and monetary economics for a very long time (others are Randy Wright, Guillaume Rocheteau, Ricardo Lagos, Nobu Kiyotaki, Mark Gertler) have something to offer. Not everyone wants to listen to us, though. The New Keynesians understand that "financial frictions" have now been demonstrated to be important, but they still haven't quite learned how to do it."

Ok, let me take a crack at this, see if I can communicate it. Sorry for being blunt, but I'd really like to try to make this clear.

"The New Keynesians understand that "financial frictions" have now been demonstrated to be important, but they still haven't quite learned how to do it."

Ok, then how specifically should they (the country) do it? Specifically, directly, precisely, in laypeople's' terms, no Zen, "Let the rocks form the river", with a this will lead to this, will lead to this,...

I often have trouble clearly and precisely understanding your prescriptions, and seeing direct, specific, head-on, this leads to this, leads to this, leads to what Krugman says not happening, or leads to a problem with what Krugman is saying.

Now I chalk up a huge part of this to the issue that it may be hard to translate what's in the highly mathematical technical papers in your area into laymen's' English. I hope this doesn't make it impossible, because then only a few hundred people out of 7 billion will have the time, background, inclination, and ability to understand it.

But Krugman, right or wrong, makes himself clear and specific to laypeople (although he sometimes gives himself book lengths to do it, like with "Peddling Prosperity"). And you look at Cochrane's recent piece about what to do about the recession/depression (http://johnhcochrane.blogspot.com/2012/03/austerity-stimulus-or-growth-now.html), it's pretty specific and direct – structural reform. I'm not convinced, but it looks pretty clear (the structural problems existed just as much when the economy was doing far better five years ago and in the mid-90s, why are they suddenly depressing things so much for the last four years, and not before?)

I've printed your paper, "Liquidity, Monetary Policy, and the Financial Crisis: ANew Monetarist Approach", but I may never have time to get through more than a little bit of it, and neither do most economists in other areas (let alone well-educated laypeople), with how busy they are, and how much pressure they face to spend time in their areas (and with their families).

So, I hope it is possible to be more direct and specific, and "this will cause this, will cause this,..." in stating your prescriptions and why Krugman's prescriptions, or models, are wrong, if they are.

Ok, then how specifically should they (the country) do it? Specifically, directly, precisely, in laypeople's' terms, no Zen, "Let the rocks form the river", with a this will lead to this, will lead to this,...

"I've printed your paper, "Liquidity, Monetary Policy, and the Financial Crisis: A New Monetarist Approach", but I may never have time to get through more than a little bit of it, and neither do most economists in other areas (let alone well-educated laypeople), with how busy they are, and how much pressure they face to spend time in their areas (and with their families)."

You keep saying that economics is a science, but saying such doesn't make it so.

Wolfram opens his book (2002) writing:

Three centuries ago science was tranformed by the dramatic idea that rules based on mathematical equations could be used to describe the natural world.

***

If theoretical science is possible at all, then at some level the systems it studies must follow definite rules.

Wolfram goes on to discuss the idea that there is so much randomness in price in markets that economics is not a science, for there do not appear to be rules that can be defined by traditional mathematics. 429-431 Later, Wolfram argues that economics is limited by the concept of computational irreducibility and cannot be stated in simple mathematical formulas (and implicitly) that such is not science.

Later Wolfram writes, that the idea of thinking about markets as collections of rational entities acting with information is "quite inadequate."

Are there answers to Wolfram's criticisms? Or, is Wolfram correct, that economics cannot be a science, especially because the world it is attempting to describe is not natural?

"You keep saying that economics is a science, but saying such doesn't make it so."

It really doesn't matter what one calls it. Giving it some other name would not change how it is done. We do the best we can, subject to our constraints, of course. The non-science (i.e., religion) creeps in when people like Krugman assert that they know the truth.

Roger Farmer is light years ahead of Krugman in his understanding of Keynesian economics, and his rigorous models do not find that fiscal policy will be effective. The tragedy is that the public gets to hear plenty about pseudo-Keynesians like Krugman, but the micro-founded Keynesian models of Farmer do not receive publicity. Indeed, I doubt if Krugman is even aware of Farmer's work

First, I don't think that Krugman writes for the NYTimes to make a living.

Beyond that, "Sport, truth, like art, is in the eye of the beholder."

What I think that Krugman is doing is putting up the only public defense that can be made of macro (and that you ought to be supporting him instead of aiding his---and your enemies---by attacking him).

From the point of view of the public, no defense can be made of what macroeconomics and the Fed permitted to happen post 2000. None. Events are beyond a catastrophy, with millions of Americans loosing everything---their jobs, homes, possession, dignity, everything.

No public defense of macroeconomics is possible. None. Krugman realizes and understands what forces are now at play in our Country and that they have to be combatted and defeated. He can give no ground or quarter to the enemy.

He did not pick the field of battle, its terrain, etc.

But, unlike everyone who attacks him here, he has the guts to engage and knows how to do such.

The mind of the public is captured with sound bites and metaphors, not books and papers.

Someone above mentioned Roger Farmer. Seriously, even if he was correct, so what? That and four quarters will buy you a soda from a machine.

Krugman understands that, not only do you have to be right, you have to sell it.

Take Roger Farmer's work to Barnes and Noble and put the best cover possible on the front. You still couldn't give away copies.

Look at the comments here. Mr. MIT or Hooka Cat or the others who hate Krugman. Collectively, they don't have enough judgment to change a light bulb.

They do no understand that Krugman/Delong/Thoma, Soros, and a few blogs are the thin line between Modernity and Chaos.

You are not fighting the hand to hand combat every day like I am at a state legislature dominated by tea party republicans. You have no idea the legislation now be offered and what is being proposed for the future.

Do me a favor. Go to Shiloh this week. It is the 150th anniversay of the American War to Preserve Modernity and form a nation. Go start thinking about how irrational the South was and ask yourself, how close are we, now? It's not that far.

In fact, I changed a light bulb just today. You're a sad, sad person, John D, really just pathetic. You need to go find something that makes you happy, because we're not really interested in hearing your crackpot rantings.

The real crime here is that Brookings Papers would publish obsolete research by two pieces of deadwood, to wit Delong and Summers. It is also sad that the Economist would write a piece on this research, as if it is serious.

It appears that John D has decided to no longer sign his absurd posts. Rest assured, John, I know you're here, and I will continue to mock you at every turn. Wherever you go, whatever you do, I'll be watching you.

Generally, though, there is a pessimistic, downbeat feeling that macro is useless - I have heard this more than once, from people who intend to spend their lives doing it. It's basically the idea of "Yeah, well, macro hasn't done society a lot of good, but this is the best we can do, and anyway I need a job."

I wonder how me of these students were forced to take classes in macro from Hooka Cat?

I made the error of trying to understand SW's "Liquidity, Monetary Policy, and the Financial Crisis: A new Monetarist Approach". You are right; I am not an academic. I am a money manager with a Ph.D. in economics from Chicago. This paper is a classic academic exercise that produces results that are only interesting to other academics but which have no relevance to actual practice. It is papers like this that give academics a bad name.

The result is nonsense. Under the conditions of your model, the proper monetary response to a liquidity crisis is for the Fed to conduct open market SALES that RAISE the real rate of interest!!! You are correct that this is an insight that does not arise from IS/LM. Why this is a superior insight eludes me.

Your paper is interesting from the standpoint of the question - which of your unrealistic assumptions is to blame for this crazy result. I think it has to do with the fact that financial intermediaries only function as risk-sharers. There is no savings and investment side of the economy so that the role that financial intermediaries normally play is not considered. By this simplification, you miss the fact that higher real interest rates make a financial crisis worse, make the desire for liquidity GREATER. High interest rates make the investments of a bank shakier and prompt more bank runs.

So what about this model is testable? Well some of the conclusions I would bet good money can be falsified. One conclusion, that in a financial crisis, "if the central bank purchases private assets, this is at best irrelevant, changing no prices or quantities." Conclusion - false.

For example, how does your model explain the ECB's LTRO approach to the banking crisis in Europe? The ECB bought private assets - loans to banks. This significantly decreased banks funding costs, reduced sovereign yields in Italy and Spain, and saw short term interbank funding costs fall. Your model would have counseled that such a course of action would be at best irrelevant, or at worse wrongheaded since it led to lower real rates in affected countries.

I thank Mr Williamson however for this perfect example of how "progress" in economics is actually "regress". I will take IS/LM versus his model any day.

In my view, you represent everything that is reprehensible in our human species. Cowardice (posting anonymously). Ignorance (not understanding what you are critiquing). And arrogance (pretending you know better). Frankly, people like you are beginning to weary me.

In my view, you represent everything that is reprehensible in our human species. Cowardice (posting anonymously). Ignorance (not understanding what you are critiquing). And arrogance (pretending you know better). Frankly, people like you are beginning to weary me.

I will call your bluff.

I will stop posting anonymously on four conditions.

First, SW publishes whatever I write. If he calls me a crank, I insist on being able to call him one.

Second, that he deletes any anon comment directed at one of my comments.

Third, if I cite to an article, paper, blog, etc., in support, that he has to answer the question.

For example, if I ask does he agree with a statement by Cochrane or a book by Taylor, he has to answer

Last, if he gives a conclusion and I challenge him, he has to answer fully, completely and truthfully.

For example, above SW writes, only as an ipse dixit or conclusion:

Post crisis is another story. The failure of the Fed in 2009 and beyond is a slowness in catching up with developments on the research front that have been with us for a long time.Question: What failure of the Fed? The newspaper story---who, what, when, where, how, and why

If I find such a future statement and ask him to fully explain, he must answer

I wouldn't say I have my finger on the pulse of young macroeconomists worldwide, but I know a bunch here at Michigan.

Mostly, they think that RBC models don't explain the macroeconomy, but they intend to use microfounded DSGE and (occasionally) VARs because that's what everyone uses and they don't know of any alternatives. They seem eager to incorporate search frictions and heterogeneity into DSGE models, and seem to have very little interest in fiscal policy, liquidity traps, or other elements of the Keynesian revival. Though they don't like RBC, they generally use technology shocks as the drivers of their models because these are much easier to use than demand shocks, especially in big complex models that already have a lot of heterogeneity and/or search stuff going on. There is also some interest in financial frictions, though not as much as I would have expected.

Generally, though, there is a pessimistic, downbeat feeling that macro is useless - I have heard this more than once, from people who intend to spend their lives doing it. It's basically the idea of "Yeah, well, macro hasn't done society a lot of good, but this is the best we can do, and anyway I need a job."

A lot of this is probably specific to Michigan, though.

Also, remember, when you consider what young economists think, it's important not to only look at young macroeconomists, because that's a self-selected set. The attitude that "macro is useless" is quite prevalent among, say, game theorists (both young and old). Not that those people especially know or care about IS-LM Keynesianism...they just tend to regard the entire enterprise as a joke. "Are you going to be a macro guy?" one young theorist asked me. "What's the oldest model that macro people use? It keeps changing because they haven't found anything. Why are you going to waste your intelligence on that?"

Finally, I would not say that my own ideas are representative of young economists. My physics background and general combative nature make me much quicker to condemn whole disciplines...

Krugman is Mozart, composing tunes that have wide appeal. Williamson and Andolfatto are Schoenberg and Webern, composing according to the rigors of the 12-tone canon. It's very hard to listen to but its rigorous.

It is my impression that Mozart spent his time creating beautiful music. Krugman's main talent appears to be in laying foul eggs. And your main attribute appears to be an appetite for his waste. Enjoy.

What ticks me off about the attitude you described (you are wasting your intelligence etc.) is that it takes an uncomfortable fact of life and turns it into a failure of the profession. Yes, macro is hard,it is really hard. Models are hard to describe, hard to solve, theories are hard to test, there are few observations and everything is simultaneously determined. Yes there is a lot we don't know. Does it mean we should be doing less of it? Or should we bite the bullet and do the best we can with the little we have?

The trouble with Krugman and IS/LM is that he gives the impression that macro is easy, if only people could see the light.

"it takes an uncomfortable fact of life and turns it into a failure of the profession. Yes, macro is hard,it is really hard....The trouble with Krugman and IS/LM is that he gives the impression that macro is easy, if only people could see the light."

I don't quite understand all this pessimism. Of course RBC models don't explain everything. What do you expect? That thing is from 1982. These are very exciting times we're living in. I look at the world, and see many applications for all the ideas that people have been working on for the last 50 years. Game theory, mechanism design, private information theory, theory of contracts, banking theory, applied methods. Why spend your time focusing on things that don't work and whining about it? Go play with some models. Stretch your imagination. There are wonderful tools out there to pick up and use.

First of all, when I say "RBC", I don't mean Kydland & Prescott (1982). What I mean is that people don't really believe that productivity shocks (or news shocks about productivity, or any supply shocks of any kind) are the cause of recessions, but they put these in their models because demand shocks require things like imperfect competition, sticky prices, etc. (or even harder stuff).

As for the reason for my pessimism, well, yes we can make tons and tons of models, but how do we choose between those models? We seem to have done a generally crappy job of that. It seems to me that if macro theory is not disciplined by empirical verification of the microfoundations, then theorists can just make a universe of theories to describe anything and everything, and the theories that get accepted will simply be picked by consensus, "common sense" intuition, and sometimes even politics. So I decided to focus on understanding how financial markets work, in the hope that that will help discipline macro models.

Or, put in the pugilistic tone of the blogosphere: If I wanted to spend my life doing clunky math to describe worlds that don't exist, I would have stayed in physics and been a string theorist. ;)

Noah seems to have missed the entire last 15 years of quantitative macro. Sticky prices and imperfect competition are hardly absent; in fact, it is hard to avoid them. "Demand" shocks, whatever those really are, are also everywhere -- just look at the Smets-Wouters model.

Noah, if you're going to make assertions about macro, you might want to check their validity first.

1. When I say "believe" I don't mean faith-based belief. I mean belief as in Bayesian probability. Come on, gimme at least that much credit! ;)

2. Why have we done a crappy job of choosing between models? This deserves a very long answer, but one example is that we failed to pay attention to models of financial crises before a financial crisis actually happened. The Dymond-Dybvig model existed, and we knew there was a shadow banking system that could experience runs. But precious few people were screaming "Diamond-Dybvig! Diamond-Dybvig!" before the runs actually happened.

3. What makes me so special?? Other than my boyish good looks and witty charm, I can't think of anything...why?

4. "Clunky" = few insights from looking at the equations. Doesn't mean "bad", but does mean "boring", at least for moi...

5. No the math isn't "wrong". I do think it often conveys a false sense of precision (see the famous Ramsay quote), but that's a secondary issue. I am not one of those people who thinks math is bad for economics, obviously. Actually, econ seems to have gotten a lot less mathematical since the 70s and 80s. I love those old papers, like the No-Trade Theorem paper or Glosten-Milgrom. But now I'm rambling...

Anon:

Sure, sticky prices are used in pure business-cycle models, albeit in the unrealistic-but-tractable Calvo-pricing formulation. But what about other models? Check out Dave Ratner's job market paper (he's in my year at Michigan):http://www-personal.umich.edu/~dratner/ExpRating_JMPdraft.pdfIt's all about heterogeneity and labor search, but at its heart it's an RBC model.

And Dave did very well with this paper, got offers from Cornell and the NY Fed (though he ended up going to the FRB).

So one guy left out nominal rigidities in a paper not about monetary policy and did well on the market, and you think that is representative of the field? I used to think you were just misguided in your notions, but now I am beginning to think you're being deliberately disingenuous.

You're sounding confused. You have some vague complaints about economists getting stuff wrong. You think Ratner's model is RBC, but it's actually search and matching. Different animal I'm afraid. You've got some vague ideas about how people use math in economics. You seem to like Physics, and claim you could do it if you wanted to, but your negativity is the type I hear from students in graduate school who really can't cut the mustard. What's going on exactly?

Got it. I will never use specific examples of things again, lest people think those examples are the only ones I know of. ;)

Steve:

I did like physics. I was pretty good at it in undergrad, at least if grades are anything to go by. I don't think I could do it now, though, at least not at a high level...I've been away from it too long and I'm too old. Well, maybe I could but I'm not going to go find out.

Could I cut the mustard in grad school? I didn't have much trouble with prelims. Classes I did OK in, above median but usually not at the top. I'm not disgruntled...the Michigan econ department is great. Are you asking why I'm complaining about stuff? Well, arguing helps me think, for one thing. Also, I decided not to be a "macro guy," so maybe my lambasting of macro is a subconscious attempt to justify my decision to myself??

But really, I think I just need some outlet in which I can blow off steam by taking nonsense to task, and macro is the most obvious pocket of nonsense in my nearby intellectual vicinity... ;)

I mean, why do you spend so much page space insulting Krugman? Does Krugman, or what Krugman says, really matter to you at all? I am guessing "no." But it's fun, right?

I don't think it's good fun for some people to set out to destroy something they don't understand.

What is there we don't understand?

http://noahpinionblog.blogspot.com/

In macroeconomics, the public insurgency has been led by Krugman, DeLong, Quiggin, and a few others. The complaint against DSGE (or "Lucasian macro," as Krugman labels it) has been similar to that against string theory: Lucasian models, say the insurgents, failed to predict the crisis, and failed to predict which policies would be the most effective in combating the recession that followed. If theories can't predict things, say the rebels in both fields, they should be junked. In macroeconomics, like in particle physics, the rebels claimed that a stifling culture of intellectual conformity is inhibiting the search for new approaches.

Now here's another striking parallel. In both controversies, a handful of defenders of the existing paradigm have resorted to arguing that theories shouldn't need to make predictions.

There there is the SW exception to Lucasian macro. SW claims, albeit his boat was sunk by a torpedo from a Chicago Phd hedge fund guy, that his model can predict inflation, but not financial crisis.

Krugman has essentially no effect on the academic work that is done in macroeconomics, and the people who actually make policy decisions don't care much either about what he says. People like Larry Summers and Joe Stiglitz have some of the same ideas, but Krugman did not put those ideas in their heads. All Krugman can change is public perception of economists and their work. That's where the damage comes, as you can see in this comment thread.

As to the charge that, "All Krugman can change is public perception of economists and their work," let me assure you that my POV was not changed by Krugman.

My POV was changed when I read that speech by Lucas and could see, from events, it was a lie. I then started reading Keen and Stiglitz, trying to put a thumb on why our economy hasn't been functioning properly for years.

When I got in and looked at the data and saw that, put for private debt, we have had contracting GDP since about 2000, well alarm bells really went off. It was then that at lot of writing by the FT and some for Soros really came together and it became clear that macro had been asleep, exactly as explained by Noah, elsewhere.

But what really concerns me is the total lack of concern for people. If macro had been doing its job, the way economists wrote and talked would be different. Instead the denial shows consciousness of guilt.

Noah, some people take this stuff seriously you know. Krugman does real damage because he misrepresents macroeconomists in the public domain. He talks as if the frontier of macro is at a first year graduate level. He politicizes everything. This is damaging, and worth responding to.

"But what really concerns me is the total lack of concern for people. If macro had been doing its job, the way economists wrote and talked would be different. Instead the denial shows consciousness of guilt."

I see John D back again. You've been told that lots of people are working on these problems -- for example, look at Per Krusell and Tony Smith's work on how business cycles affect rich and poor people differently -- and tell me that nobody cares about the poor. We do care, but we're trying to be scientific about what can be done and whether that policy has other consequences. You're just mouthing off about how economists hate poor people. You want to know who really hates poor people? People who oppose Walmarts and other big box stores that lower the cost of consumer goods.

You really should seek therapy John, before you snap and shoot someone.

I stand by my opinion that the SWs "Liquidity" article is a fail. It was cited to me as an example of the superiority of "new" models over the old tried and true IS/LM workhorse that Krugman still champions. But on the Krugman standard for success of a model, one that you can use to help make sense of the world and how policy makers should react to it, it is no help.

Now I don't deny that this model may shed insight on a class of models that monetary economists are playing with. That may lead to progress on some dimension. But that's inside baseball and not the criterion that Krugman is using to evaluate models.

I further note that a bank (financial intermediary) in this model is not a bank in the traditional sense. The model creates a demand by agents for basically two types of mediums of exchange - currency and bonds. Agents have a portfolio of these; in a world without banks, agents might find themselves with suboptimal portfolio holdings of these assets. The banks exist to help turn excess supplies of one asset into another. These banks are more like clearinghouses.

A liquidity crisis in this model is bizzare. It is when there are too many bonds and the rate of interest falls to the rate of inflation so that the return on bonds is the return on currency.

How does this capture any essential element of liqudity crises as we know them? Liquidity crises come about becuase of a change in the demand for liquidity, not from the supply side of assets.

Is it no wonder that in this model that the cure for this bizzare liquidity crisis (caused by too many government bonds) that the solution is for the government to soak up some bonds and raise the interest rate on bonds above that of cash. I fail to see how this corresponds to any element of a real economy.

But then I am not a monetary economist and I probably have not got the intuition right. Since I have made this investment in time to understand this model, I would appreciate Mr. Williamson or Mr. Andolfatto pointing me to some discussion of the intuition behind this model so I can understand what it captures that other models do not.

Until you care enough to explain yourselves to the hoi polloi, at least as much as Krugman, your posts criticizing him will fall on deaf ears.

Steve, this is an important paper in that it has the surprising result that "In response to a financial crisis, conventional monetary policy should act to mitigate the liquidity asset scarcity, but since the scarcity is in terms of interest bearing assets, this mitigation typically involves increasing the real interest rate, which must be accomplished through an open market sale of government bonds"

Can you explain the intuition of why this is in laypeople's terms? It would be very helpful for well educated laypeople, economists not specializing in this area, and policymakers to understand what happens here, what's the story, to make selling bonds and raising interest rates beneficial in a financial crisis.

" Liquidity crises come about becuase of a change in the demand for liquidity, not from the supply side of assets."

How could you possibly know? In general equilibrium, supply and demand do not have clear meanings, so applying this kind of short-hand thinking is not helpful. In fact, it is exactly the sort of thing Krugman does.

SW Critic Edward Allen writes, "Liquidity crises come about because of a change in the demand for liquidity, not from the supply side of assets."

And SW Defender, Anon, replies, “How could you possibly know? In general equilibrium, supply and demand do not have clear meanings, so applying this kind of short-hand thinking is not helpful.”

It’s a curious reply, in part, because it’s difficult to envision an economy that’s simultaneously in a liquidity crisis and in a state of general equilibrium. (It’s also curious because there’s no place for money in the general equilibrium construct of the Arrow-Debreu type, a point Frank Hahn emphasized.)

I’m sure it’s very hard to write and solve the models mentioned in the posts above. The questions is: is the effort worthwhile? I don’t really know the answer, but if, in order to write and solve these equations, you must exclude agents whose expectations are formed on the basis of different “theories,” which give rise to (say) different beliefs about the future rate of inflation, and if you have to make very restrictive assumptions to avoid unstable, even explosive, dynamics, and if you’ve got to ignore the implications of the Sonnenschein–Mantel–Debreu theorem, which raises hard questions about the whole microfoundations approach, and if the explanatory harvest hasn’t been as satisfying as many hoped, then maybe some soul searching, or at least a bit more intellectual modesty, is in order.

I am so tired of people misusing SMD. SMD does not say anything can happen; instead, it says that some utility function and endowment allocation will give rise to an excess demand function that only satisfies a small number of properties (continuity, Walras' law). But many of those utility functions imply individual behavior inconsistent with estimates of price and income elasticities. SMD really isn't relevant in general, and certainly does not have much to say about microfoundations.

Again, the wacky stuff under SMD only occurs for unreasonable preferences, generally those with really strong income effects. If we saw those kind of income effects, there would for example be a strong trend in leisure in response to the rising real wage. That is not evident in the data, and therefore we aren't in a world where SMD really matters. Why is this so damn hard for you people to understand?

Anon 03:40 PM, "I am so tired of people misusing SMD." What does this personal revelation have to do with the issues at hand?

"SMD really isn't relevant in general, and certainly does not have much to say about microfoundations." If you're building a representative agent model, then I suppose it isn't relevant. But that’s because there’s nothing to aggregate, and, in any event, it’s an act of charity to call these “micro-founded” models.

Let’s get back to the original problem, which was a liquidity crisis and, if you’ll permit the inference, an economy out of general equilibrium. Outside GE, some agents are rationed; they have too much of one thing, not enough of another, and so they make offers with aim of improving their situation. Now, insofar as the “micro” choices of these agents must be aggregated to reach a “macro” result, you’re going to run into an SMD problem, and it won’t go away just because you’re “tired of it.”

As Arrow once put it, “In the aggregate, the hypothesis of rational behavior has in general no implications.”

Anon 08.54 pm asks, “Why so vague Greg? can you give me an example of an ‘SMD problem’?”

Yes, I can, but first let’s go back to your original claim (assuming it’s yours – there are a lot of Anons out there) i.e., the claim that “the wacky stuff under SMD only occurs for unreasonable preferences, generally those with really strong income effects. If we saw those kind of income effects, there would for example be a strong trend in leisure in response to the rising real wage. That is not evident in the data, and therefore we aren't in a world where SMD really matters.”

Three points: 1) rising real wages in Europe are, in fact, correlated with reduced labor hours; 2) given the institution of the 40-hour week, in the U.S. at least, it’s not easy to adjust one’s hours at the margin, assuming, of course, that real wages have actually been rising in the first place; and 3) income effects aren’t the only source of SMD problems, so that even if there were no correlation between rising wages and falling labor hours, it wouldn’t follow that “we aren’t in a world where SMD really matters.”

So, to supply the example you asked for, imagine that individual demand schedules aren’t independent, but are interdependent. People respond to fads, they want to “keep up with the Jonses” or to surpass them (note: I wasn’t persuaded by SW’s criticisms of Robert Frank’s economics of relative position). If you’ll grant these interdependent preferences, then it should be easy to envision the positive feedback loops they could create and the difficulties these self-reinforcing interactions pose for the theorist who wishes to derive macroeconomic results from (these) microeconomic foundations.

Nope, it is rather easy, it just doesn't involve a representative agent. Try reading something by Rao Aiyagari, Per Krusell, Victor Rios-Rull, Truman Bewley, Tony Smith, or any of about a hundred other people who have heterogeneous agents in their models. You're not quite so smart as you suppose, Greg.

And I suspect Greg that your fine political theory education did not really prepare you to discuss SMD or any deep results in general equilibrium theory. You might try playing with blocks, they seem more your speed.

In the future, for the sake of symmetry, to say nothing of nobility, I'd like to see more macroeconomists droning on about how other fields are useless as currently constructed and can only be reformed with the aid of their amazing wisdom.

That's the truly heroic response to current conditions. Wouldn't you guys like to be heroes too?

That's the spirit! And there's no need to confine yourself to economics or the social sciences, either. Why deny researchers in theology, law, gender studies, astrophysics, or education the considerable benefit of your input?

Frankly, I've never even understood the purpose of half the stuff that goes on in those areas, and I think it's high time somebody did something about it. People need yr help!

We are all missing the point. Both Krugman and Williamson are producing art not science. This explains the visceral reactions. Krugman produces art we can understand, like da Vinci. Williamson provides art like Picasso which people do not understand and think its junk. Both are representations of reality. Once we realize econ is art not science the poisonous reactions become explicable.

I am not an economist, but am starting to follow blogs out of interest. I disagree with your point that one can't learn about economics in blogs. While I'm not an economist, I majored in it in college circa 20 years ago. Along the lines of Noah Smith's post above regarding physics, if grades are any indication, I had a pretty good understanding of it. Back to my point, I find that well written blogs clarify abstract concepts. On the other hand are blogs that obfuscate fairly simple concepts. As an example of the latter, I extracted this from one of your entries:

"But how do we differentiate between what is structural and what is not? That's very subtle. We know that any model is an abstraction, and will therefore be wrong - literally. But the art of building a good model is to make it less wrong on the dimensions we are going to use it for than on the dimensions we will not use it for."

The subsequent example of inflation and employment seems to be saying that this abstraction was a matter of a misinterpretion of cause and effect in the relationship. That's really not very abstract.

Whether he is right or wrong, I believe that Krugman makes an effort to educate rather than talk above his audience. If you were to try and follow that general paradigm, I think you might have a better shot of having your point taken seriously. From what I've read here, the only thing that is clear is that you disagree with him and DeLong/Summers. Good luck!

Steve, a question about empirics and macroeconomics. Near as I can tell, you've been predicting large inflation for awhile now. How long would low core inflation have to continue before you would abandon whatever model you are using to predict this inflation?

Also- something that bother me about micro-founded models- as a physicists, emergence is a big deal. We see behavior on macroscales that is impossible to predict from the microfoundations of a theory i.e. you'll never predict super-conductivity by looking at the rules governing electrons or lattices. You have to formulate a macro-scale theory of collective excitations (cooper pairing/phonons). Even in very simple systems, the collective operates in ways you can't predict from the individual behavior. When I see economics papers with representative agents, I cringe- this approach is very likely hiding interesting aggregate behavior thats really important! Better to avoid microfounding at all, and build something semi-empirical!

Actually, for you and anonymous above: Buy a copy of my text book, Macroeconomics. The most recent edition is the 4th, but you'll pay an arm and a leg for that (not my fault). Earlier editions, used, are cheap. Read the introduction (or go further if you want), and that will tell you the basics of what you need to know. Macroeconomic problems are not like problems in physics at all. You might think that you can observe how an economic system behaves, uncover the statistical regularities, and then make accurate predictions about the effects of changes in economic policy. Not so. The problem (different from physics) is that the behavior of the system is determined by the behavior of the purposeful individual human beings in the economic system. When economic policy changes, the behavior of the individual human beings changes in ways that you can predict only if you model their behavior at the micro level. We use the tools of science in economics - mathematics, statistics - but we do it in a very different way, and for good reasons.

No, they are much harder, because no matter how many times you tell a particle where it might "quantum leap" to, it won't change its behavior. Humans are stubborn in their refusal to obey this law, except perhaps you.

I work in the financial markets and am not an economist. But as an engineer by background have sufficient analytical skills to follow economic blogs. Having followed these form around 2006 and I follow many, I have to say that your post above is quite petty. PK made some unconventional but bold calls through one of the worst economic crises in recent history. He was jeered and mocked at by many, especially the “freshwater” economists. Many of his critics had other solutions/theories many of which included inflation as a major threat. Its been 5 years since crisis and most of his calls have come true. Now I see other economists saying “well – things may have happened that way but not the way it was predicted in the PK model” or “just you wait for another ? years and what I say will come true”. All I can say is PK is justified in getting aggressive against his critics. I don’t know which line of economic models reflect the world more accurately and it would be foolish of me to judge that as an amateur “blog-fed” economist, but I know that PK’s school of thought has been the more useful through some of these testing times. And I think that’s what matters in the end. Without any such acknowledgement, just throwing vitriol on PK, Brad et al just seems petty.

This is a microcosm of how poor this blog post and responses have been. I said PK made bold calls that came true – you don’t have to be an economist to know that. And his critics’ calls haven’t come true. And I said his critics rarely credit him for getting it right. And unlike other posters I am trying not to pass judgement on the economics that people such as David and Stephen have spent years studying just after reading a few blogs. And lo and behold – I am either crazy or an idiot. And I need to grow up? Remarkable.

Steve, I'm aware of the Lucas critique,I think you didn't understand what I meant. Microfoundations are well and good- but if you use a representative agent, you are ignoring all of the interesting behavior you should see in the aggregate. At this point, dodging the Lucas critique seems to be the least of your worries- your no longer capturing what you want to with your model.

I recently had a chance to chat briefly with Peter Diamond, who I respect greatly, about DSGE models. Needless to say, he is not a fan (to put it mildly). Yet when I asked him what they should be replaced with, he just shrugged and said something along the lines that young economists should figure it out. Contrary to Krugman, he did not advocate a return to ISLM. Krugman and his fellow-travellers should really read Thomas Kuhn. Even a paradigm with terrible predictive ability will not be abandoned until a a better paradigm comes along. And it certainly will not be replaced with an older paradigm that has an even worse predictive ability simply because it is simpler.

Wait a minute! Nowhere did I write that he wants to dismiss all or some DSGE models. His answer followed my question on how he feels about the increasing use of search theory in DSGE models. If I interpret his words correctly he seems to think that they should eventually be replaced with something better, and that young scholars should be working towards that goal. But he was not at all dismissive. C'mon, be fair now.

When you say "not a fan," that sounds like he was being dismissive. There are some disparaging things in his Nobel lecture, I think, from what I remember. Of course it's hard to argue with: we can do better, and the young people are going to give us the improvements. Sure.

I realize that comments from non-adherents are unwelcome here, especially those (like me) sadly unschooled in the arcane economic arts, but as one who attempts in my own small way to do science, I'm left a bit bemused by your Kermit-like arm-waving cries that you're "doing Science, goddamit!" Color me Inigo, but you keep using that word and I do not think that word means what you think it means. Surely science means attempting to make sense of the workings of the universe by actually investigating those workings and testing our proposed explanations, or am I merely confused? Do your economic models produce actual results consistent with what happens in the "real world"? Can they make testable predictions? Do those predictions match what we see? Krugman and DeLong et al seem to manage that - are you claiming that they are faking their information or lying about it in general? I have no axe to grind here, I'm just curious over whether your blind animosity is simply the reaction to being part of a group which has been 'dissed', or whether there is something more substantive to it. As far as I can tell, holding onto beliefs which stubbornly refuse to align with the workings of the world isn't science, no matter how strong your faith may be. No offense intended, of course!

"holding onto beliefs which stubbornly refuse to align with the workings of the world isn't science, no matter how strong your faith may be."

You say you are unschooled. But you seem to have the idea that I have some views that are somehow at odds with reality. Where does that idea come from, and what makes you think that Krugman and DeLong somehow have a view of the world that matches reality?

Really? And that's why Stephen replies to so many unpersuaded writers?

"As far as I can tell, holding onto beliefs which stubbornly refuse to align with the workings of the world isn't science, no matter how strong your faith may be. "

As for this, the only beliefs that Stephen and myself (and other working macroeconomists whom I know) hold are these:

When you're trying to understand a phenomenon in economics, you should do so in a way that makes clear the objectives of the decision-makers (whomever they are) in your model, and you should avoid selecting outcomes of your model in which the decision-makers in the model will be *routinely* fooled by what occurs. Economists allowed to violate these rules will be able to "explain" anything, anytime. Which is exactly what Krugman and "Fellow Travelers" do.

You are free to dislike these premises, but what they do not do is predispose you to concluding anything about Right vs. Left etc. Plenty of models we use have outcomes that are bad for many, if not all involved.

"But you seem to have the idea that I have some views that are somehow at odds with reality. Where does that idea come from, and what makes you think that Krugman and DeLong somehow have a view of the world that matches reality?"

It may come from the observable fact that Krugman and DeLong present clear explanations of their world views contrasted with data from various and sundry sources that presumably are accurate. They may be lying in their presentations and claims, but given that they provide sources and links, it would seem a tad unlikely that they could get away with this for very long if such was the case.As to the question of your particular interpretation of the universe, let's use a crude logical construction:1. K presents a method of understanding the economic workings of the world, and provides evidence to support his claims.2. W says K is is wrong because he's rude and his model is trash.3. K says the model(s) which W uses are inaccurate and unhelpful compared to the model(s) he uses.4. W says this is not correct.

So, I come to the argument as an outsider, and I see one side presenting relatively clear, simple explanations that seem accurate, and the other side using the argument that if only I understood economic theory it would be clear why K is wrong and W is right. I'm merely a simple man, and Einsteinian physics is a bit beyond my grasp, yet those few predictions which I have seen clearly made (gravitational effects on light, relativistic time effects, etc.) appear to have been demonstrated to be accurate. Perhaps economic theory is inherently more complex and abstruse than physics, but surely it can produce at least a few simple, clear, testable models. And if they can be tested, surely they can be assessed as to their accuracy. If they accurately measure what we observe, then why do K et al claim they don't? If they do not accurately measure what we see, then why do w et al so vehemently defend them? I'm not too worried about the somewhat foolish ad hominem stuff, btw; that's actually the most 'scientific' part of the argument I've seen so far. I'm merely looking for simple answers in a complicated world.

wow!from the peanut gallery i see one thing for sure; those who predicted high inflation are a bit bitter. Bully for PK to use his bully pulpit to be bullish*! Now if the corporate media would only get bullish*- maybe the truth would prevail. *challenge the liars and panderers

"Exactly. What do you think I'm up to here? I don't want them to get away with it."

But doesn't it seem a bit unhelpful to merely say "They're wrong! and rude to boot!"? How are they wrong? How is the IS/LM model "trash"? Does it not do what Krugman claims that it does? Does it produce inaccurate results? Is Krugman, in fact, making stuff up when he produces those graphs? How? Would it kill you to present some countervailing data of your own? I mean, I can whip up a model of how matter works using the 5 Primary Elements: Earth, Air, Fire, Water and Pizza, and I could devise all sorts of lovely, elegant justifications (one thing I can do well is produce lots of bullshit in a hurry), and claims for my models of outstanding accuracy, and numerous offensive personal characterizations of those old-fashioned and Alzheimery old fart chemists who claimed in their senility that my model was full of crap. Still, unless I as able to actually lay out clearly where I was right and they were wrong, I suspect people might be forgiven for thinking that I didn't actually have much of a leg to stand on, realistically speaking. Smartass one-liners and refusal to address substantive questions certainly don't help. Here in what some of us like to laughingly call the "scientific community", that sort of approach gets you about as far as stuffing a long-dead fish down the Dean's pants. Still, your blog, your rules. If you wish to guard your hard-won knowledge as jealously as a 37th-degree Mason hoards the secrets of his Temple, I can't say I blame you. I'm sure if only I knew as much as you do I would be completely convinced*. Alas that I don't!

* This is what we call in the trade a "gross exaggeration for purposes of sarcastic, if not comedic, effect".

To FilterCoffee, with apologies for my (or my computer's) puzzling inability to get the 'reply' button to work):

1. "Really? And that's why Stephen replies to so many unpersuaded writers?"

Well, perhaps I'm mistaken but it does appear that there is a clear distinction between Stephen's replies to those who agree with him and those who don't. Not to mention that Stephen does not appear to the layman's eye to be terribly interested in persuading the unpersuaded. Still, my vision is notoriously poor and perhaps I'm overlooking things.

2. "As for this, the only beliefs that Stephen and myself (and other working macroeconomists whom I know) hold are these:

When you're trying to understand a phenomenon in economics, you should do so in a way that makes clear the objectives of the decision-makers (whomever they are) in your model, and you should avoid selecting outcomes of your model in which the decision-makers in the model will be *routinely* fooled by what occurs. Economists allowed to violate these rules will be able to "explain" anything, anytime. Which is exactly what Krugman and "Fellow Travelers" do."

Eh? I apologize for my slowness, but that second "belief" you cite left me even more confused than normal. First, I thought the outcome of the model was a consequence of what you put in, not something that you could either choose or that could somehow "fool" the components of your model (retrospectively?). Is it possible that economic models are far more interactive than I gave them credit? Do you mean that some amoral economist could generate a host of outcomes and then choose to present only the one or ones that he or she preferred? Or is there a meaning there that I have missed?Then, as to your accusation that Krugman and his "Fellow Travellers" (love that term, by the way! I, myself am a running dog for the Imperialist Warmongers, but I digress) choose to violate your two rules and therefore "explain" anything, anytime (presumably therefore explaining nothing). Can you take Krugman's model, and using the same violation of your rules, show very different results than he does? I'm afraid that I'm not an economist and therefore unqualified to perform those manipulations, but I'd be fascinated to see them done. It would certainly go a long way towards persuading me of the accuracy of your claims.

3. "You are free to dislike these premises, but what they do not do is predispose you to concluding anything about Right vs. Left etc. Plenty of models we use have outcomes that are bad for many, if not all involved."

As the famous Tech Sergeant Chen said under roughly similar circumstances "You've lost me.." I am (as I believe I said before) a simple man, and all I wanted to see was whether (a) the oft-made claim here that economics was a science was justifiable (and I will freely admit that my standards on that regard are fairly low - I regard many things as 'a science', and in fact, there have been many times that I have regarded science as an art, but that's neither here nor there), and (b) the claims that Krugman and company are wrong if not unethical could be substantiated or at least supported. My politics, and the politics of economic models in general or specifically, are not anything I particularly care about here. I just want to knwo if your models work, and why you say Krugman's models are wrong, and why. It's easy to say "Because shut up, that's why", but surely in science one has an obligation to provide some sort of proof. Rudeness is par for the course, but it doesn't replace evidence.Anyway, sorry to take up so much space on this very enjoyable discussion, but other duties call. Feel free to dimiss my ignorant intrusions with a disdainful wave of the hand, if you wish; it won't bother me none if none of my questions get answered substantively.

First, ISLM is not really an economic model, it is a set of statistical relationships -- in that sense, if we are free to choose the parameters we can fit the data. Krugman does this. But then he ASSUMES that those parameters are invariant to changes in policy, and they're almost certainly not.

The economic models that Krugman dismisses try to derive structural relationships that will not change when policy changes; any such relationship MUST be derived from individual agents acting in their own best interest (however perceived). This is science -- we estimate our models on some data, test them against more data, and try to fix them when they fail. So yes, our models "work" -- the Smets-Wouters model fits the data as well as any ISLM construct -- but Krugman won't acknowledge it. There are many problems with that model, but to claim it doesn't fit the data is absurd.

Now we're getting somewhere ( my reply button does nt work either, may be a problem with the site..)

Ill try to answer one of your question: yes, expectations are absolutely something that the modeling economist chooses in general. This is because modern models derive behavior that is optimal given the beliefs that the " agents " in their models hold. But we can't see Peoples beliefs , so if left to the discretion of the modeler, anything can be rationalized. This is why rational expectations are used. They restrict beliefs about the future to be those that don't generate outcomes in the model that would disconfirm the expectations. You can view it as a Faustian bargain, since it hinders us from talking about expectations as a wildly swinging causal force in outcomes, but it slows down snake oil salesmen from choosing outcomes and then telling you they are inevitabilities.

Steve, a question about empirics and macroeconomics. Near as I can tell, you've been predicting large inflation for awhile now. How long would low core inflation have to continue before you would abandon whatever model you are using to predict this inflation?

I've said this before. I do not issue forecasts. I don't have the time or inclination to do it. I try to understand the state of the world, and I try to say something about the risks, as I see them, associated with current monetary policy decisions. If you look back through my posts, you'll see that I've had worries about future inflation for a long time, but I've always said that the Fed has the power to control it. Now: (i) the Fed has committed itself in a particular way; (ii) the Fed believes (incorrectly) that "reserve-draining will actually control inflation; (iii) the economy is on a more optimistic trajectory. This makes me much more pessimistic about the path for future inflation.

But, I don't issue forecasts, so I can't give you numbers. One piece of advice though. Ignore core inflation. It's pointless to be thinking about that. The Fed has told us it cares about raw pce inflation. Focus on that.

Do you take issue with Krugman's politics or his economics? I think that its bullshit that he throws models under the bus because they're too pretty and mathy - but this is all because his job is to light a political fire behind a mask of fauconomics. He may believe the shit he says, he may not - but that doesn't matter. He's there to piss people off, rile people up, and sell papers.

I'm not sure why beating up on macroeconomists helps, or why we need the IS-LM model to support the President.

1) So, if you were PK, how would you frame the public debate?

2) If PK wrote tomorrow, SW is right, "buy gold," inflation is coming, Obama jumped the shark, how would that help Obama? That is, after all, your basic message (housing prices were down again, last month, BTW).

Such a column would result in what: (a) 3 states; (b) 65 republican senators; (c) 300 republicans in the house.

The reason why PK is pissed at macro is that he has been left with one old canon with which to fight a broad intellectual war.

I don't like the character stuff, someone's arrogant or immature. If someone strongly thinks they're right they can sound arrogant, or they can sound arrogant because they think it's necessary to get through. They can be doing it with good intentions, not out of poor character, even if their analysis is mistaken. And someone can be anonymous not out of cowardice, but because they think it jeopardizes their family's livelihood to make their opinions known, and for little reason, as it wouldn't make that much difference.

The best thing you can do is not insult people's character when it's not really warranted, thus discouraging questions and getting wrong views out into the open so they can be corrected, it's to explain clearly and directly in a way non-specialists can understand, why they're wrong.

A good place to start is to explain the intuition, the story, what leads to what leads to what, why in Steve's paper it's good for unemployment, or GDP, to respond to a financial crisis by selling government bonds and raising interest rates. (and what about after the financial crisis subsides but the economy is still depressed, like now?)

Anon 04:10 and 04:12, Let's review our dialogue: 1) You asserted that supply and demand had no meaning in GE; 2) I pointed out that an economy experiencing a liquidity crisis wouldn't be in a state of GE, and that there are well-known limits to the GE approach; 3) You claimed that one of these, SMD, is irrelevant because income effects are small as shown by the fact that increased wage rates haven’t resulted in reduced labor hours; 4) I pointed out that increased wages are, in fact, correlated with reduced labor hours in Europe; 5) You asked me to provide an example of an "SMD problem"; and 6) I pointed to the case of interdependent preferences.

So, now, you’re onto a new line of attack, pointing out that there are lots of GE models with heterogeneous agents from which you conclude, “You're not quite so smart as you suppose, Greg.” I pointed specifically to agents who apply different theories to the data at-hand and who form different expectations about, e.g., the future rate of inflation. I had posed this problem in response to Stephen’s post on inflation to which he replied, “You can try to write down a model where heterogeneous agents have diverse beliefs, and everyone is optimizing. That's a very hard problem. I wish you luck.”

Having run out of substance, you move onto your hoped for coup de grace, “And I suspect Greg that your fine political theory education did not really prepare you to discuss SMD or any deep results in general equilibrium theory. You might try playing with blocks, they seem more your speed.”

I thought you and I *were* discussing SMD. You asked for an example where SMD posed problems for the microfoundations approach to macro, and I gave you one. And instead of replying to that, you visited my blog (http://www.the-human-predicament.com/) discovered that I wrote a book about Rousseau, and think this somehow disqualifies me from discussing GE theory. Why not just leave the personal stuff aside and stick to the issues?